Interview with Barrie Cassidy, ABC Insiders

SUBJECTS: Budget 2017

BARRIE CASSIDY:

Treasurer, welcome.

TREASURER:

Morning.

CASSIDY:

Will you accept some of the blame if the banks pass on these costs?

TREASURER:

Bill Shorten's always just interested in the politics and the personalities. He is always interested in his job, my job, the Prime Minister's job. We are just interested in the jobs of Australians. What we have done with the banks is, I think, both fair and it actually is good policy because it's consistent with banking levy regimes and taxation arrangements in other parts of the world. Let's not forget that our major banks have about a 20 to 40 basis point advantage because of the nature of the regulation and structure of our financial system. Mining companies pay royalties as well as their company tax. What we have done here is structured a levy which isn't on pensioners' bank accounts, which is what the Labor Party's bank tax was on. We have structured it on their liabilities which doesn't include deposit accounts, doesn't include their regulatory capital in tier one, doesn't include shareholders' capital. So, that's a fair tax and a well-structured tax.

CASSIDY:

But will you accept some of the blame if they pass on the costs?

TREASURER:

The next movement of the Reserve Bank – and it is completely up to them – but market commentators would forecast their next movement would be more likely to be up than down. When the Reserve Bank changes things, they move things by 25 basis points. I talked about an up to 40 basis point advantage that the banks have. This is up to six basis point tax. So, what we’ve done on this occasion is we have resourced the competition regulator to ensure that the banks are honest in their dealings with their customers. That didn't happen last time when the Labor Party put on a bank tax. Last time that happened, Chris Bowen said, "The market is the market and that's how it works". They are not applying that test to us but we will put the pressure on, Barrie, to make sure they don't pass the costs on. And if they do, they will say to every banking customer in Australia you are right about the big banks. You are absolutely right about them. That's why they shouldn't do it.

CASSIDY:

But would you accept some of the blame if they choose to pass this on?

TREASURER:

I accept the responsibility for all of our decisions, Barrie. All the steps we have taken in the Budget.

CASSIDY:

Yes, but this is the problem that you simply can’t guarantee that. You can't guarantee they won't pass on the costs.

TREASURER:

In the same way that banks have put up interest rates even when there hasn't been a move in the Reserve Bank cash rate. I mean, banks will find any way they can to charge their customers more.

CASSIDY:

So, therefore, you can't guarantee that they won’t pass on the costs?

TREASURER:

What you can do is you can ensure not just an unquestionably strong banking system – which we have done under our rules – but you can make it more competitive. So, what we’ve done is we have put a standing commission within the regulator to police competition within the banks. The smaller and regional banks, which were hit by Labor's bank tax, they are not hit by this. Smaller banks – and the best thing at the end of the day you can do, we will put the pressure on through the regulator, but the best thing you can do is if you are unhappy with how a bank is seeking to fleece you – that's what they would be doing if they pass this on – go to another bank.

CASSIDY:

But isn’t the problem here that the banks simply can't absorb this because that's not the way business works?

TREASURER:

That's nonsense.

CASSIDY:

No business will accept smaller profits.

TREASURER:

That is nonsense. They can absorb this in the same way they absorb the increases in their costs that happen every day. A bank is worth something to its shareholders when they look after their customers. That's true for any company. If banks think that the way to build shareholder value is to fleece their customers, then I don't think that's a very sound business strategy.

CASSIDY:

Even if they don't pass it on…

TREASURER:

It is six points, by the way, six basis points. Reserve Bank cash rates move by 25 basis points at a time and to suggest that this is the end of financial civilisation as we know it is one of the biggest overreaches in a whinge about a tax I've ever seen.

CASSIDY:

If they choose not to pass it on through charges or higher interest rates, though, it will mean smaller profits, smaller dividends and that affects anybody with a superannuation account, it affects all the shareholders.

TREASURER:

Again, the banks have their own decisions to make. The banks in Australia have a return on equity which is about twice, if not more than that, what you see particularly in other parts of the advanced developed economies of the world. I'm all for profitable companies and having profitable banks is much better than the alternative. We are talking about $1.5 billion out of a profit pool of almost $33 billion. The estimates by groups like S&P and others put it around 3.4 per cent of the total profits so 96.6 per cent completely untouched of $33 billion in profits.

CASSIDY:

Why didn't you apply it to all of the banks? They all make profits and have a smaller levy right across the sector?

TREASURER:

For the exact point I made before. The large banks have between a 20 to 40 basis point advantage in the financial system in Australia because of the way our regulatory regime works...

CASSIDY:

You are levelling the playing field?

TREASURER:

This is a pro-productivity measure. I can tell you the regional banks are very happy about this because, for once, a Government has actually heard what they've been saying to us, “You've got to level the playing field for us here.” They've got good products, good customers, they are very community-focused. I think they are doing good things to ensure banking customers have more choices. I'm all for giving more customers more choices. The best ward off against the banks just being able to charge you willy-nilly is to have a better, more productive and competitive banking system.

CASSIDY:

Now, this is permanent, isn’t it?

TREASURER:

Yes.

CASSIDY:

Then it’s not really a levy because levies come off after a while – it is a tax.

TREASURER:

Levies can stay on permanently. You can call it whatever you like, Barrie, but what this is a permanent structural change to the way we tax our financial system.

CASSIDY:

So you can increase it at any time?

TREASURER:

Well, we’re not going to. It is at six points…

CASSIDY:

But in the UK, they put it on, they have increased it eight or nine times.

TREASURER:

Well, we have no plans to do that whatsoever. We set it at the level we think is appropriate and we think is fair. You can put up personal income taxes. That’s what Bill Shorten intends to do. He wants Australians on personal income tax...

CASSIDY:

We will get to that.

TREASURER:

Ok, we’ll come back to that. Fair enough.

CASSIDY:

I want to ask what happens to the banks if their profits fall away.

TREASURER:

Well, we haven’t seen that for some time, Barrie…

CASSIDY:

But it might happen. Would you then take it away?

TREASURER:

We’re cutting company tax, Barrie. We are cutting company tax from 30 per cent to 25 per cent.

CASSIDY:

[inaudible] cut the company tax for the banks.

TREASURER:

Well, Barrie, unless you’re a member of the Senate. Unless you have 39 seats, 38 seats in the Senate, then you are no more in a position to say that than I am.

CASSIDY:

Well, you judge the Senate's behaviour by getting rid of the zombie measures. You know that there are things the Senate will not do and they will not pass on the company tax cuts to the big banks.

TREASURER:

But, Barrie, before the last election, people didn't think we were going to get $25 billion worth of savings measures through. But we persisted with those and we got them through. They said we couldn't get the Australian Building and Construction Commission restored and you may have said that yourself but we did. The registered organisation…

CASSIDY:

You say you want Australian companies to be internationally competitive. And what’s happening with the big banks is they are paying an extra $6 billion over four years in taxes and they will never get the company tax cut.

TREASURER:

We have got legislation in the Parliament to do exactly that. Understand this, if Bill Shorten thinks the most competitive position Australia can be in 10 years from now, and if the Parliament thinks this, to have a 30 per cent corporate tax rate, which is by that time likely to be if not in the top three of the corporate tax rates in the world, and to have a top marginal personal income tax rate, which means you work one day for the Government and you work one day for yourself...

CASSIDY:

No, you don't. It doesn't work that way.

TREASURER:

Every extra dollar you earn…

CASSIDY:

Over $180,000.

TREASURER:

Every extra dollar you earn, one extra dollar you work one day for the Government and you work one day for yourself. That is not a fair tax system. Paul Keating agrees with me. You used to work with Paul. You used to agree with Paul Keating.

CASSIDY:

I never did.

TREASURER:

You worked in that Government, though.

CASSIDY:

Somebody on $200,000 pays 31 per cent of their salary overall in taxes. The point is it is not dollar-for-dollar.

TREASURER:

The marginal tax rate...

CASSIDY:

It’s a progressive system.

TREASURER:

It is a progressive system and we support a progressive system. But what does it say to people? I met a business here the other day at Box Hill. That business started from nothing, obviously. They are entrepreneurs. When they started the business, they didn't take any income. They didn't draw a salary at all. That business is now just tipping $50 million in turnover. The payoff for those guys who built that business is that they'll be in a position to earn down the track. Now, if you are saying to them the great advantage when they really start to hit their straps is that you have to work one day for the Government and one day for yourself on every extra dollar you earn, then that's not a fair Australia. That's not fair to anyone.

CASSIDY:

Every extra dollar over $180,000. On the NDIS…

TREASURER:

These are people who have taken risks to grow the economy.

CASSIDY:

Absolutely.

TREASURER:

And I think that they should be rewarded for their effort and their investment and their risk. These are people who created over 200 jobs here in Melbourne. I don't think they should be penalised in the way that others seem to suggest they should be.

CASSIDY:

Alright, the increase in the Medicare levy to pay for the NDIS. The Labor Party wants to quarantine those who – well, they don't want them to pay until they earn $87,000. Why is that not a fairer system than yours?

TREASURER:

Not one dollar of what Bill Shorten announced the other night is going to NDIS on increasing the Medicare levy. Andrew Leigh made that clear two days ago. They are not increasing the Medicare levy to pay for the NDIS. They don't think there is a funding black hole. There is. It is $55.7 billion. So, he’s just increasing the tax. The sole reason we are increasing the Medicare levy in two years from now is to fill the funding hole in the NDIS. If there wasn't a funding hole, we wouldn't be doing it. That is the only reason and we are only introducing it in that year because that's the year in which the additional bills come in. The other point he has made is he wants to extend – as we were just discussing – the deficit levy and make it a permanent increase in the marginal tax rate. He already spent all of that money at the last election. You can't spend money twice. At the last election, he said he was going to reverse the company tax cuts and he was going to extend the deficit levy. All of that funding into the future was to pay for his promises on health and education and even then, he was $16.5 billion short. So, Bill Shorten is putting a cruel hoax – if he wants to increase the top rate of marginal tax, if he wants businesses to pay higher rates of tax, he’s already spent all that money. That's how we got the NDIS hole in the first place because they spent money twice.

CASSIDY:

Putting his argument to one side, it’s not the silliest idea anyway because you've still got a need to repair the Budget.

TREASURER:

No, we don't think we should increase the Medicare levy for budget repair. No, we don’t agree with that position. Bringing the budget back to balance…

CASSIDY:

We are talking here about the budget repair levy.

TREASURER:

The budget repair levy has had it’s three year life. We promised that's what it was. That was the legislation, we are not breaking the promise.

CASSIDY:

But by that time, you thought you might have made inroads into the deficit and that hasn't happened.

TREASURER:

No, we made a promise, we put it into legislation and we said that that would come off, and we have kept our promise. Now, that is a completely different issue from our decision two years later to put in place an increase in the Medicare levy of half a per cent and that means that the less you earn, the less you pay – it cuts in at just over $20,000 – for some families, not until you are almost approaching $40,000. And then, the more you earn, the more you pay. Now, that is exactly what the Labor Party did when they introduced this. And we have done exactly the same thing, and I really wish they didn't turn this into a political football. It doesn’t have to be…

CASSIDY:

You won't be doing deals on this?

TREASURER:

No, because, it’s a fair measure, Barrie…

CASSIDY:

So emphatically no, there will be no deals with the budget repair levy?

TREASURER:

We have already come to the middle on this. We didn't want to put an increase in the levy on. We wanted to be able to do it through savings. The Senate, in their decision, decided to reject that. Ok. So, we’ll come to the middle. We are standing in the middle on this and we would invite other members who want to be responsible about this and actually give the certainty to people living with a disability and their families, the certainty funding is there. We can agree on that, surely.

CASSIDY:

Now, I want to ask about some of the forecasts, wages growth in particular. We are putting up a graphic now for Reserve Bank forecasts. Forecasts against reality, really. The coloured line tracks wages growth forecasts. Black line is the reality. Now clearly, the growth figures have been exaggerated for years. Why is it any different this time?

TREASURER:

Well, those figures track the fall in the terms of trade. That’s what they also track. Now, what that graph shows is that no one predicted the steepness of the fall in the terms of trade and the steepness in the falloff in mining investment in this country. Now, what Phil Lowe himself has said is that we are 90 per cent of the way through. When you look on that chart, you can see what we have been going through. He says we are 90 per cent of the way through of the falloff in mining investment. Our forecasts reflect that view. So, yes, it is fair to say that over the last five years or so, that no one really has been able to properly assess the impact in the fall of the terms of trade and the falloff in mining investment which has a flow-on effect into all of these other numbers. Now, working forward, we are seeing the mining investment sector over the back end of the forward estimates starting to improve, the terms of trade. We have taken a far more conservative position on commodity prices than in all of those previous forecasts you have seen on that chart and we were commended for doing so by the ratings agencies in December.

CASSIDY:

So, we are heading for 3 per cent plus in wages. Is your advice, then, to unions they can start locking that in?

TREASURER:

I will not give the unions advice because I doubt they'll take it from me. My advice to companies is to grow, become more productive, take the opportunities you’ve got out there and when you have the opportunity because of increased profitability, to share that with your employees. I believe they…

CASSIDY:

Well, a logical extension of that is that the employees should now demand that and can quote the Treasurer that the three per cent is just around the corner…

TREASURER:

That’s based on the assumption that we continue to take opportunities, improve our profitability, secure the opportunities of these better days ahead. You can't just assume them, Barrie, and workers can't assume them either. Neither can businesses. They have to be secured. We have to achieve the growth in order to achieve these results.